Expanding your Business: Advantages and Disadvantages for Buyers and Sellers in an Acquisition
Today will be exploring the benefits and risks of acquiring a Business by an Asset Purchase vs a Share Purchase. The most significant difference between the two is that in an Asset Purchase, the buyer has the ability to “pick and choose” which assets are being purchased, in turn permitting himself to choose only the best assets and leave behind any liabilities.
In contrast, within a Share Purchase, the buyer has no control over what is obtained and will need to carry out extensive legal due diligence to ascertain all the assets and liabilities.
The flexibility of an Asset Purchase means that this structure is often favoured by buyers, especially where a business has significant liabilities, which can be left behind. To discover whether your Business would benefit more from an Asset Purchase or a Share Purchase please read our previous blog: Expanding your business: The difference between an asset purchase and a share purchase.
There are some other key advantages/disadvantages for both Buyers and Sellers which you should consider.
In order to assist in your decision making, we have prepared a helpful (albeit non-exhaustive) list portraying some of the advantages and disadvantages to a share purchase compared to an asset purchase below.
Advantages and Disadvantages of a Share Purchase
| Advantages for Buyer | Disadvantages for Buyer |
| The transaction structure is simpler than an asset sale as the Buyer is acquiring a single asset (i.e. the target shares). | Buyer acquires the target company subject to all of its historic and current liabilities. |
| TUPE is unlikely to apply to the transaction, thus avoiding the need to inform and consult with the employees and target business. | If the Buyer requires 100% ownership of the target business, all of the Seller’s shareholders must agree to the transaction. |
| If the company has recognised brand, goodwill and reputation, the Buyer can capitalize on the company’s success and reputation. | The transaction may be subject to the statutory prohibition on financial assistance, which could interfere with the Buyer’s plans for funding the transaction. |
| Stamp Duty is not payable in a Share Sale (unless the company is “land rich”). | There are obvious additional risks associated with a share purchase. The Buyer must engage in extensive and detailed due diligence to detect liabilities and mitigate risks associated with the target company. |
| Advantages for Seller | Disadvantages for Seller |
| The transaction structure is simpler than an asset sale as the Buyer is acquiring a single asset (i.e. the target shares). | Transaction may be frustrated if not all of the Sellers are prepared to sell their shares to the Buyer on the terms proposed. |
| TUPE is unlikely to apply to the transaction, thus avoiding the need to inform and consult with the employees and target business. | Transaction is subject to statutory controls on financial promotions and financial assistance. |
| Client and supplier contracts remain within the company. This in turn provides less risk and effort to ensure the continuity of those contracts. | The Buyer will retain all contingent liabilities of the business, therefore in order to protect against these liabilities, the Seller may be required to provide extensive warranties and indemnities. |
| There may be a better overall tax return for the shareholders in a share sale. | Partial sum from the purchase price may need held on trust or the Seller may need to provide a bank guarantee as security if there is a breach of a warranty. |
Advantages and Disadvantages of an Asset Purchase
| Advantages for Buyer | Disadvantages for Buyer |
| Buyer can choose which assets and liabilities (if any) it acquires. | Transaction is more complex in nature and requires for extensive documentation. This can be lengthy and costly. |
| Transaction unlikely to require shareholder consent or other shareholder involvement. | Buyer must comply with the applicable employee protections imposed by TUPE 2006. |
| Transaction not subject to statutory controls on financial promotions and financial assistance. | Third parties may refuse to consent to assign contracts which the Buyer considers to be vital for the purpose of the business. |
| Usually, the liabilities remain with the Seller and do not transfer to the Buyer (please note that the Buyer can choose to acquire liabilities if it so wishes). | Stamp Duty may be payable on the transfer of land and other real property. |
| Advantages for Seller | Disadvantages for Seller |
| Transaction is not subject to statutory controls on financial promotions and financial assistance. | Seller may be left with problematic assets or liabilities that the Buyer is not prepared to take on. |
| Transaction is unlikely to require consent of Buyer’s shareholders. | Corporate Sellers do not receive the sale proceeds directly. |
| A Seller typically provides fewer warranties and indemnities in an asset sale. | The transaction is more complex and the process requires extensive documentation. This can be lengthy and costly. |
| The seller can exclude any assets which they have no intention of transferring. | Seller must comply with applicable Seller obligations under TUPE 2006. |
Making the Right Choice
Although there are advantages and disadvantages for the Buy Side and Sell Side associated with a Share Sale and an Asset Sale transaction, there are many ways to mitigate those risks.
It is important to involve a legal advisor, as well as an accountant at an early stage to ensure that the correct purchase and sale strategy is chosen.
At Pepperells Solicitors, we provide a range of Corporate and Commercial Property legal assistance and advice services for businesses. For more information, please get in touch via our website or alternatively call us on 01482 326511.
